An impressive February rebound in Chinese cotton yarn imports bodes well for full-year prospects, but a weaker currency and looming policy changes may color the outlook for shipments in coming months. China Customs is reporting the largest cotton yarn importer in the world imported 153,300 metric tons of the product last month, by far the largest February on record. Following two months of losses, these shipments into the country rose by nearly half from a year ago, the biggest advance in ten months. With current cotton policy keeping domestic cotton and cotton yarn prices artificially high, local fabric mills remain eager to source more yarn overseas, stoking cotton consumption and cotton yarn exports in a number of spinners around the world.

This latest reading boosted early-2014 imports, a positive--if early--sign for full-year import prospects. Cumulative shipments of cotton yarn through February stand at 334,200 metric tons, 17.6% more versus this same period last year. This amount marks the largest year-to-date tally on record, hinting--albeit a bit prematurely--that full-year cotton yarn imports may climb again to a record in 2014. Viewed another way, over the last eleven years January-February imports grew at least as fast as this year's advance six different times. Of those six times, full-year imports expanded all six years, up an average 25.2%. While we are not quite this optimistic, if this trend repeats itself again this year, China will import an unprecedented volume of cotton yarn in 2014, likely boosting foreign cotton mill demand to a record this marketing year.

However, we caution two developing issues may crimp this outlook. First, the People's Bank of China recently weakened its currency considerably from a recent modern-day high. In fact, last week the currency fell to its lowest in a year against the dollar, taking the yuan from one of the most attractive emerging-market carry trades to one of the least in just a matter of weeks.

This issue raises import costs in China and narrows the dollar-denominated spread between Chinese and US cotton prices. At the same time, India's rupee has climbed to an eight-month high against the dollar. These two trends mean the rupee has surged against the yuan, making Indian cotton yarn exports all the more expensive for Chinese buyers, the largest foreign customers of Indian spinners.

A second issue surrounds the recent announcement of looming cut in the Reserve auction floor price. Coupled with the depreciation in the RMB, a lower reserve floor price of 17,250 yuan per ton may push Chinese yarn prices lower, which is likely to pressure imported yarn prices lower. These presumably lower prices may discourage foreign spinners from shipping as much to China. What's more, if domestic cotton and yarn prices fall sharply following this cut in the auction price, Chinese fabric manufacturers may be less interested in sourcing foreign yarns as well. Still, the new auction price, although much lower than the previous one, will still be more than 1,000 yuan above world prices, suggesting China may continue to source foreign yarns later this year. How the currency and this policy evolve in coming months will be key in determining China's appetite for more foreign yarns in 2014.